Economics

The effects of industry structure on economic exposure

Article Abstract:

A firm is subject to "economic exposure" if changes in exchange rates affect the firm's value, as measured by the present value of its future cash flows. This paper shows that in many forms of competition, including the most commonly studied case of monopoly, the economic exposure of an exporting firm is simply proportional to the firm's net revenues based in foreign currency. This simple result breaks down under some, but not all, forms of competition between the exporting firm and foreign firms. In that case, the exporting firm needs to know about the price elasticity of its product demand and its marginal cost in order to assess its exposure to exchange rates. The key determinant of economic exposure, therefore, is the competitive structure of the industry in which a firm operates. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31: F23; G31; G32 Keywords: Economic exposure; Foreign exchange exposure; Industrial structure

Author: Marston, Richard C.

Publisher:Butterworth-Heinemann Ltd.Publication Name:Journal of International Money and FinanceSubject:EconomicsISSN:0261-5606Year:2001

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Exchange rate exposure, hedging, and the use of foreign currency derivatives

Article Abstract:

We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using a sample of S&P 500 nonfinancial firms for 1993, we find evidence that firms use currency derivatives for hedging, as their use, significantly reduces the exchange-rate exposure firms face. We also find that, while the decision to use derivatives depends on exposure factors (i.e., foreign sales and foreign trade) and on variables largely associated with theories of optimal hedging (i.e., size and R&D expenditures), the level of derivatives used depends only on a firm's exposure through foreign sales and trade. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F23; F30; G30 Keywords: Risk management; Multinationals; Corporate policies: Foreign trade

Author: Allayannis, George, Ofek, Eli

Publisher:Butterworth-Heinemann Ltd.Publication Name:Journal of International Money and FinanceSubject:EconomicsISSN:0261-5606Year:2001